Frank Talk Blog

Share this page with your friends:

Are We Limited by Linear Thinking?

July 10, 2012

Is your portfolio limited by linear thinking? We believe so.

Many linear thinkers believe that to solve a problem, you need to follow a simple, logical path, a step-by-step sequence involving two variables. One and one is always two. Here’s a diagram depicting the progression.

When it comes to solving today’s social, political and economic ills, linear thinkers believe the solution is more regulation and government intervention. To wit: the thousands of pages piling up from the solutions of Sarbanes-Oxley, the Volcker Rule and Dodd-Frank.

There’s a danger with this line of thinking because life is much more complex. Government policies are necessary for a level playing field for businesses, but they require a nonlinear way of thinking. Consider how scientists, mathematicians, psychologists and meteorologists have had tremendous success when they step outside the stiff boundaries required by linear thinking. Nonlinear math equations and systems have been used to explain weight loss, the spread of happiness, strength of metals and hurricanes. Millions of Americans’ lives have been improved by a deeper level of understanding of these issues.

This nonlinear line of thinking needs to be adopted by policymakers. As we enter a critical period in the U.S. election cycle, Americans deserve thoughtful regulations that maintain the spirit found within the Declaration of Independence. These are lofty, but attainable goals, as long as we have leaders who are brave enough to fully consider how their actions affect job creation, social stability, economic prosperity, trust, and free markets.

Prohibition is an obvious example of extreme regulation in American history. With all the good intentions of improving the lives of Americans by eliminating the perceived source of corruption, crime and poverty, politicians outlawed the making, transporting and selling of alcohol. Politicians did not anticipate the extent of unintended consequences, as the illegal commodity only encouraged bootlegging, speakeasies and the mafia.

If you’re older than 21, raise your glass to the repeal in 1933 and the more practical and balanced approach that followed, as states chose their own drinking ages until the 1980s, when the need to reduce drunk driving fatalities led to the National Minimum Drinking Age Act of 1984.

Investors today are the unintended victims of the linear thinking that has permeated through today’s government policies. A friend of mine shared his parents’ experience with me that many retired workers can relate to. After years of working hard and prudently saving for retirement, my friend’s parents felt that their nest egg was large enough to retire and live off the interest. At the time, their accumulated savings of $500,000 was invested in long-term Treasury bonds yielding roughly 6 percent. The annual interest of $30,000 satisfied their needs.

Fast forward to this year, when 30-year and 10-year government yields have been so manipulated by the Federal Reserve that the rates have been reduced to near-record lows. This knocks the interest income on the retirees’ half a million dollar nest egg to only $5,000 per year.

By regulating yields, the Fed had the good intention of allowing people to borrow money at low cost to stimulate the economy, but the unintended consequence was a huge tax on retired people, forcing many to go back to work to supplement today’s meager earnings.

Think Nonlinearly: A Time to be Resourceful

Don’t be limited by linear thinking in your portfolio. As an alternative to low yielding Treasury bonds, consider resources stocks that pay dividends. We’ve found that most materials, utilities and energy stocks in the S&P 500 Index pay a dividend higher than the 10-year Treasury: Materials and utilities companies yield an average of 2.3 percent and 4.1 percent, respectively, while energy stocks pay an average yield of 2.2 percent.

Nonlinear thinkers have historically benefitted from the inclusion of natural resources as part of a balanced portfolio. Financial Planning found that, when included in a diversified portfolio and rebalanced annually, of natural resources funds with 10 year returns, the Global Resources Fund added the most return.

Please consider carefully a fund’s investment objectives, risks, charges and expenses. For this and other important information, obtain a fund prospectus by visiting www.usfunds.com or by calling 1-800-US-FUNDS (1-800-873-8637). Read it carefully before investing. Distributed by U.S. Global Brokerage, Inc.

Foreign and emerging market investing involves special risks such as currency fluctuation and less public disclosure, as well as economic and political risk. Because the Global Resources Fund concentrates its investments in a specific industry, the fund may be subject to greater risks and fluctuations than a portfolio representing a broader range of industries.

Diversification does not protect an investor from market risks and does not assure a profit. All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies.

Please consider carefully a fund's investment objectives, risks, charges and expenses. For this and other important information, obtain a fund prospectus by clicking here or by calling 1-800-US-FUNDS (1-800-873-8637). Read it carefully before investing. Distributed by U.S. Global Brokerage, Inc.

With respect to the Fidelity Institutional Money Market Treasury Portfolio, which is distributed by Fidelity Distributors Corporation, an investment in a money market fund is neither insured nor guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although money market funds seek to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the fund.

Read additional important information.

Bond funds are subject to interest-rate risk; their value declines as interest rates rise. Tax-exempt income is federal income tax free. A portion of this income may be subject to state and local income taxes, and if applicable, may subject certain investors to the Alternative Minimum Tax as well. The Near-Term Tax Free Fund may invest up to 20% of its assets in securities that pay taxable interest. Income or fund distributions attributable to capital gains are usually subject to both state and federal income taxes. The tax free funds may be exposed to risks related to a concentration of investments in a particular state or geographic area. These investments present risks resulting from changes in economic conditions of the region or issuer.

Gold, precious metals, and precious minerals funds may be susceptible to adverse economic, political or regulatory developments due to concentrating in a single theme. The prices of gold, precious metals, and precious minerals are subject to substantial price fluctuations over short periods of time and may be affected by unpredicted international monetary and political policies. We suggest investing no more than 5% to 10% of your portfolio in these sectors.

Foreign and emerging market investing involves special risks such as currency fluctuation and less public disclosure, as well as economic and political risk. By investing in a specific geographic region, a regional fund’s returns and share price may be more volatile than those of a less concentrated portfolio.

The Emerging Europe Fund invests more than 25% of its investments in companies principally engaged in the oil & gas or banking industries. The risk of concentrating investments in this group of industries will make the fund more susceptible to risk in these industries than funds which do not concentrate their investments in an industry and may make the fund’s performance more volatile.

Because the Global Resources Fund concentrates its investments in a specific industry, the fund may be subject to greater risks and fluctuations than a portfolio representing a broader range of industries.

Stock markets can be volatile and share prices can fluctuate in response to sector-related and other risks as described in the fund prospectus.

Morningstar Ratings are based on risk-adjusted return. The Overall Morningstar Rating for a fund is derived from a weighted-average of the performance figures associated with its three-, five- and ten-year (if applicable) Morningstar Rating metrics. Past performance does not guarantee future results. For each fund with at least a three-year history, Morningstar calculates a Morningstar Rating? based on a Morningstar Risk-Adjusted Return measure that accounts for variation in a fund’s monthly performance (including the effects of sales charges, loads, and redemption fees), placing more emphasis on downward variations and rewarding consistent performance. The top 10% of funds in each category receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5% receive 2 stars and the bottom 10% receive 1 star. (Each share class is counted as a fraction of one fund within this scale and rated separately, which may cause slight variations in the distribution percentages.)

Each of the mutual funds or services referred to in the U.S. Global Investors, Inc. website may be offered only to persons in the United States. This website should not be considered a solicitation or offering of any investment product or service to investors residing outside the United States.

Certain materials on the site may contain dated information. The information provided was current at the time of publication. For current information regarding any of the funds mentioned in such materials, please visit the fund performance page.

Some link(s) above may be directed to a third-party website(s). U.S. Global Investors does not endorse all information supplied by this/these website(s) and is not responsible for its/their content.

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.